Will Washington Throw States a Lifeline, or Tell Them to Swim?

Policymakers in Washington are debating whether states need more stimulus money, or whether it's time for them to start cutting.
by | July 6, 2010 AT 3:00 AM

Good morning and welcome back. I hope everyone had a nice 4th. As I settled back into the work routine this morning, several stories caught my eye.

The story of the day is undoubtedly Kimberly Kindy's report in the Washington Post about the gulf (forgive me) between BP's claims about its oil-skimming capabalities and the reality. "In a March report that was not questioned by federal officials, BP said it had the capacity to skim and remove 491,721 barrels of oil each day in the event of a major spill," writes Kindy. The reality: "Skimming has captured only 67,143 barrels, and BP has relied on burning to remove 238,095 barrels."

However, other stories bear more directly on non-Gulf states.

First up, the continuing debate on how (or whether) Washington should help state and local governments.Yesterday, the New York Times's (mildly) conservative columnist, David Brooks, endorsed federal assistance. Policymakers, wrote Brooks, should seek to "mitigate the pain caused by the state governments that are slashing spending. You need a program modeled on Race to the Top. You will provide federal money now to states that pass responsible long-term budget plans that will reduce spending and pension commitments. That would save public-sector jobs and ease contractionary pressures without throwing the country into a fiscal-debt spiral."

A stimulus "Race to the Top." I wonder how Governing readers would feel about that?

According to the Times's Jackie Calmes, Obama administration economists largely agree (though the political types worry about the politics of increasing the deficit further).

However, the Post's Pulitzer Prize-winning business columnist Steve Pearlstein isn't completely sold. "The liberal Democratic narrative on fiscal policy this week runs something like this: Because of steep declines in tax revenue caused by the recession, state and local governments are facing severe budget shortfalls -- $90 billion in the case of states alone. Unless the federal government steps in to borrow more money to fill the hole, vital services will be cut, 1 million additional jobs will be lost, and the economy will be dragged back into recession," writes Pearlstein.

He then highlights "a different narrative to describe the current situation that is equally defensible but leads to a very different policy prescription." To wit:

Since the last recession a decade ago, spending by state and local governments has grown faster than the economy. The percentage of the workforce employed by state and local governments rose steadily over that period, from 13.6 percent to more than 15 percent today. And during most of that same period, the compensation of government workers rose faster than that of private sector employees, particularly as a result of generous (some would say lavish) health insurance and pension benefits negotiated by their unions.

All of that seemed reasonable when skyrocketing property values, corporate profits and investment gains were swelling government coffers -- so much so that many states wound up cutting taxes. But now that the credit bubble has burst and tax revenue has plummeted, many states have significant structural deficits that will not disappear even when the economy returns to normal levels of growth and employment. Providing additional federal assistance to those states will only serve to postpone the tax increases and spending cuts that will inevitably be needed to bring budgets back into balance.

The policy prescriptions that come from this narrative are stark. According to Pearlstein, they might include cutting a million state and local jobs, reducing pay and benefits by 5 percent across the board, or raising taxes.

Which narrative wins out here in Washington will help determine whether Washington throws states' a lifeline or tells them to swim.

Finally, the Washington Post's Ezra Klein has a typically astute think piece on the rise of the regulator. In "President Obama's first two years in office" writes Klein, "many of the most important details [were left] to regulators rather than inscribing them in law. The Wall Street bill, for instance, has more than 30 studies in it and does not prescribe things like the level of capital a bank has to hold or the precise way the Volcker rule is implemented or what is to be done about the ratings agencies. It leaves those decisions to regulators." So too with many of the most important decisions about health reform.

For readers who like it wonky, I can't recommend Klein's daily email, Wonkbook, highly enough.